In Memory of Circuit City Stores

by John Mehrmann

Many things contribute to the success or failure of any organization. But usually there is one event or decision that marks the turning point, for good or bad. Find out what it was in Circuit City's case and why the results were so disastrous.

In Good to Great by Jim Collins, Circuit City was acknowledged as one of the companies that rose from good to great status by virtue of the appropriate culture and exceptional business strategy. The recognition bestowed on Circuit City was considerable and well deserved. The growth and success of Circuit City was contrasted sharply by the collapse of Silo Stores during the same period of two decades. What happened to a good to great company that it is now gone, and what can we learn from this closing chapter of the second largest electronics retail chain that is painfully relevant during the current economic challenges?

There are many factors that contribute to the success or failure of any organization. Intense pressures from external market conditions can impede profitability. The rise and fall of consumer confidence, investments, and economic turmoil can create overwhelming obstacles. Competition and the evolution of technology can wreak havoc in the best laid plans. Nonetheless, these are factors that are faced by all companies to virtually the same degree. It is not the challenge that distinguishes the success of an organization, but rather the response to the challenge. Companies that slay the economic and competitive dragons survive and eventually thrive. Occasionally the internal response to external challenges can weaken and organization infrastructure to the point of collapse. Let us reflect on this with the example of Circuit City.

Through the 1980's and 1990's Circuit City succeeded in expanding a network of stores from coast to coast. This network of stores was supported by a framework of logistics centers to minimize freight and inventory. This gave Circuit City an advantage for securing and protecting margins on products by reducing overhead and freight. The stores were connected by a carefully constructed nerve center of technology that enabled the consumer electronics retail giant to track loyal customers, identify purchasing trends, and provide world class customer service. As market conditions changed, Circuit City management carefully adapted strategies to accommodate service needs, relying on a network of best-in-class service provider partners to provide professional and courteous customer support. The collaboration and carefully connected network was consistent with a culture that allowed the retail kingdom to remain flexible, profitable, and prosperous for two decades.

As with any great tragedy, there is typically one pivotal decision that defines the collapse of an empire. In the case of Circuit City, this is most often attributed to the decision to release the highest paid sales personnel from the local stores. One might surmise that this decision was based on a desire to effectively reduce the cost of manpower while maintaining the highest number of bodies at the lowest possible price. It would be unjust to speculate a hypothesis on exactly what was in the mind of the executives that crafted this plan, but it is not difficult to guess about what was in the minds of the employees at the local stores when the announcement became public. The highest paid employees were the more tenured and experienced. Some may even say that the most tenured employees are the most loyal, having elected to stay with the retail company through thick and thin. These experienced, successful, well paid, and loyal employees were trimmed from Circuit City and quickly became a wealth of talent available for their competitors.

That seemingly insignificant decision to relieve the Circuit City bottom line by alleviating the company of top shelf employees had a significant impact on employee morale, public perception, and customer interaction. This single act by Circuit City remains decisively contrary to the very core of the culture that was so highly praised in Good to Great. Alan Wurtzel, former CEO of Circuit City, wrote of his experience in the early success of the company, "Instead of firing honest and able people who are not performing well, it is important to try to move them once or even two or three times to other positions where they might blossom." Alan Wurtzel recognized the importance of maintaining the truest competitive edge, the one asset that can truly transform business, and that is quality human capital. By removing the most experienced personnel at local stores without properly evaluating the financial impact of individual performance and contributions, Circuit City removed many t op performers without a proper impact analysis of how this would impact revenue. The sudden sucking sound was not the impromptu jettison of employees, but rather the evacuation of revenue associated with them. It was a bleeding of talented resources from which the much lauded retail giant would never recover.

In the final months of the slow decline, the retail giant considered mistakes that had already sealed the fate of other former store chains. Following in the footsteps of Montgomery Wards, plans were proposed to reinvent the stores, copy the competition, or expand into other unfamiliar retail space. A prominent proposal was fueled by discussions of merger or acquisition by Blockbuster. At the time, Blockbuster was also experiencing threats from rising competition of downloadable movies on demand and video by mail. Unlike Circuit City, Blockbuster elected to make strategic changes to leverage the core strengths of their own organization with focus on the brand and organization. Blockbuster decided not to pursue the acquisition of Circuit City, but rather updated a business plan that built upon an already established brand, company culture, core competency, and loyal consumers. This decision for Blockbuster placed the fate of the organization in the hands of the loyal employeesto successfully implement a gradual evolution of the business model, rather then a wholesale change in direction. Without a Blockbuster partner on the dance card, Circuit City tumbled into a maelstrom search for new direction from which it never emerged.

Just a few years prior to the catastrophe, Circuit City reported several hundred million dollars in retained earnings. With appropriate and flexible organizational adjustments, Circuit City might have responded to external economic pressures with greater dexterity and still retained the competitive advantage of experienced sales personnel. By fiercely protecting the core competencies and culture on which the organization had built success for two decades, Circuit City could have reinvigorated a unique value proposition and continued to differentiate the brand with loyal customers and a competitive edge. Perhaps the revenue would have been different if Circuit City had maintained the experienced and top performing sales professionals. Perhaps the goals of the company could have been achieved if clearly defined, and if the widespread personnel were actively engaged in pursuing those goals.

With mounting pressures from external conditions and competition, many companies are similarly forced to reconcile internal costs. The need to reduce expense may require organizational adjustments and redistribution of manpower. Of course, these are polite business terms for layoffs, cut backs, and elimination of personnel. Even if this is inevitable, before it occurs, think above the bottom line. Carefully consider how the performance and value to the organization can be measured by the individual contributors. Do not merely measure manpower by the cost of payroll, but also consider the financial repercussions to revenue. How much has been invested in the development and experience of the personnel in question, and how much would it cost to replace them? How much does an individual contribute to the brand image, recognition, and marketability of your organization? How does the individual contribute to revenue? How does the individual contribute to the performance of the orga nization with leadership, motivation, discipline, direction, or unique skills? How much would your competition be willing to pay for the personnel that you let go, and what would that cost you?

In recognition of a theme identified by Jim Collins in Good to Great, it is important to have the right people on the bus and then to decide where to drive it. During periods of sustained growth, this means carefully selecting and grooming the right people to drive your business. During harshly challenging times, this means making sure that you keep the right people at the helm of your business, even as you are forced to let some people go. Layoffs and restructuring can be damaging enough to motivation, adding shared pressures and responsibilities to the personnel that remain to bereave the loss of former colleagues. Make sure to consider all of the financial implications of such decisions, not just the payroll. Be aware of impact to customers, revenue, and company performance as alternative financial measurements. The fate of your company may depend upon it.

Words of Wisdom

"The biggest mistake Phil Schoonover [former Circuit City chairman, CEO and president] made was deciding to fire all of their best salespeople and keep only the marginal sales people. If Circuit City really had to cut back, I would have recommended that he do exactly the opposite."- Jeannette Howe, Executive Director of SEN

"The old adage that people are your most important asset is wrong. People are not your most important asset. The right people are."- Jim Collins, Good to Great

"In the absence of purpose we are enslaved by the mundane. It is only in defining the pinnacle of the mountain that we can find the path."- John Mehrmann, The Trusted Advocate: Accelerate Success with Authenticity and Integrity

John Mehrmann is a freelance author, industry expert and President of Executive Blueprints Inc., an organization devoted to improving business practices and developing human capital.

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